US ferrous futures rally as supply constraints push prices higher for longer

Hot-rolled coil and busheling scrap futures rallied April 13, recovering from a slight selloff during the prior week, as market participants looked to roll long hedges and take advantage of the backwardations, while short hedgers were able to sell into the rally in Q3 and Q4.

The market remains susceptible to large price swings as short interest continues to hold, with bank analysts forecasting that mill margins will correct in the medium term but the strength in steel prices will support rising margins in the near term as lead times remain elevated.

Looking forward, prime scrap prices supported by shortages and consumption from the additional capacity coming back online will pressure flat-rolled prices and thus margins.

Supply constraints will continue for the second and third quarters because of planned outages, even as more import offers have come into the market, but those offers will have limited impact in the near term because of long arrival times.

Trading volumes picked up this week; some long hedges have continued to roll further down the curve in order to earn some of the backwardations. The HRC spot market has seen recent spot tradable values up to $1,360/st this week for May/June production.

The Platts TSI US HRC index ticked down to $1,343/st on April 12, as prices are still up $903.75/st since August 2020, when the recovery began.

Positions rolled as spreads ease

The market saw the rolling of hedges throughout the whole curve, as the curve structure loosened significantly from March 30 levels.

The tightness in the April/May spread has started to dissipate, trading around flat on April 13 from a $33/st backwardation March 30, as supply remains tighter for a longer period, along with rising producer prices, long lead times and transportation concerns, it is possible to see the spread move into contango in the coming weeks.

The April/December spread has loosened by $70/st on the week to around a $330/st backwardation April 13, as April/May domestic production has sold out, forcing prices higher further down the curve. The rolling of hedges has picked up especially in April/May and July/December to earn some of the backwardations as the whole curve has loosened as spot prices have remained sideways in April. Some fresh buying has come into the curve from June through December after the March contract expiration. The December contract rallied $115/st during the past two weeks to $1,030/st. The Q3/Q4 spread eased by around $10/st to $190/st, as open interest has increased.

The 2022 contracts have continued to see activity, as positions have been rolled out to May 2022, with Q1 2022 up around $20/st from April 6. The market is starting to factor in prices that could start 2022 at higher levels than 2021.

Spreads have loosened during the week on the back of long domestic mill delivery lead times as physical market participants looked to hedge for imports to help fill the void in US demand. The Q2/Q3 spread eased by $60/st to around $55/st, with Q2/Q4 also easing to around $245/st as evidence of long hedges being rolled into Q3/Q4. The majority of the trading volumes were seen in H2 during the week. Most of the larger volumes were spread from Q2 to Q3 and Q4 to H1 2022.

US mill HRC lead times decreased slightly on April 7 to 8.8 weeks but still well above the 10-year average of 4.8 weeks.

Import offers continued to come into the market as domestic supply remained tight. HRC import offers were heard from a Canadian mill at $1,340/st for September lead time.

According to preliminary US Census data, imports of hot-rolled coil are expected to hold above the 190,000 mt level in March with an increase of just over 33% month on month coming from Canada to 113,387 mt. imports from South Korea looked to remained firm from February's level to 63,535 mt. Imports from South Korea usually feed the Gulf region.

The May exchange HRC contract arbitrage tightened on April 12 to a $3/st premium to CME, from a $3/st premium to LME on March 31.

The futures contracts trade on CME Group and the London Metal Exchange.

As of the April 6 close, the last commitment of traders by the Commodity Futures Trading Commission showed short positions by managed money decreased by 818 lots to 10,708 lots and spread positions increased by 232 lots to 2,450, while short positions by commercials decreased by 1,801 lots to 10,866 lots.

Electric-arc furnace mill margins increased week on week April 12, as HRC prices continued to sit just below record highs, with the Platts HRC/busheling spread at $834.07/st and the Platts HRC/shredded spread at $959.29/st. Margins are up around 147% since the start of Q4 2020.

Prime scrap steady as shredded falls slightly

Busheling scrap futures rebounded during the week ended April 12, with May trading back above the $600/lt level. The 2021 curve moved back into contango as the balance of the year strip moved higher by $60/lt to around $615/lt. The June-August strip traded up to $629/lt on CME Clearport on April 12. The widening arbitrage between HRC and busheling scrap has attracted buying especially versus Q3/Q4 HRC short hedges.

The HRC/busheling inter-commodity spread started to move lower for Q3/Q4, as the spread was bid $653 and $540 for July and October on CME Globex on April 13. There was continued interest in mill margins compressing, but the question remains when it will occur as more analysts are calling for shortages in prime scrap.

The September contract last traded at a $60/lt premium to spot April 13, as the market eyes forward prime scrap consumption from additional electric arc furnace capacity, the increase in auto production and strong mill demand. The Platts busheling scrap spot prices held at $570/lt on April 9.

"The market had an incredible ability to absorb volume," a supplier said.

The busheling-to-shredded scrap differential rose again to $140.25/lt as busheling prices held at $570/lt on April 9. Midwest shredded scrap prices declined to $429.75/lt on the same day. Planned auto shutdowns are expected to continue to keep prime scrap tight over obsolete grades, especially with semiconductor chip shortages in the sector. Add in the mix the rising cases of coronavirus in parts of the US.

The arbitrage between Platts HMS 1/2 80:20 CFR Turkey minus freight to the Shredded Delivered Midwest scrap spread continued to loosened week on week to a $13.21/mt premium to US MW Shredded on April 12, as transportation costs have eased slightly, as well as prices in the Midwest. The Shredded FOB East Coast price was $414.50/mt the same day, up $4.50/mt from the previous week.

The IODEX 62% Fe/US Shredded MW scrap ratio broke below the 2.5 level, with the ratio at 2.45 on April 13, as IODEX Fe 62% was at $172.35/mt. Iron ore prices have held current levels given China has imposed strict environmental controls in Tangshan, the top steel-producing region, slowing the production of steel. Goldman Sachs analysts forecast iron ore prices will decline faster than scrap prices with a rising global surplus.

Both Platts HRC EXW Indiana and Shredded Scrap Delivered Midwest index futures trade on CME Clearport and CME Globex.